America is Not the Next Greece
It’s still the Golden Age of Deficit Reduction. Thanks to the government shutdown, the final tally for the government’s operations in September—the last month of the 2013 fiscal year—was delayed for three weeks. But on Wednesday, the Treasury Department finally its Monthly Statement for September (PDF). It confirmed the continuation of a trend. The national debt — the obligations we’ve accumulated over the past 200 years—is continuing to rise, and stands at about $17 trillion. But the annual deficit, the yearly gap between tax collections and spending, is shrinking. And fast.
In September, as is usually the case in the months in which the government collects quarterly income and corporate taxes, the federal government ran a surplus: $75 billion. As a result, the total deficit for fiscal 2013 came in at $680 billion, down 38 percent, or a whopping $409 billion from $1.089 trillion in fiscal 2012. That’s an epic amount of deficit reduction in a single year. And it comes on the heels of two successive years of reduced deficits. Since peaking at $1.4 trillion in fiscal 2009, the annual deficit has fallen by more than half.
Of course, this has all taken place in the absence of a grand bargain. In 2013, as in every other year, Democrats and Republicans failed to agree on a big plan to cut entitlements, rationalize the tax code, and get more cash from higher earners. And in 2014, they will likely fail to do so again. So long as Republicans maintain a majority in the House and a blocking minority in the Senate, there can be no grand bargain, despite what many Washington worthies would have us think.
So what explains the decline? Continued growth (however unsatisfying), higher taxes, and lower spending.
In fiscal 2013, revenue rose a healthy 13.2 percent. In September alone, it was up 15 percent from the year before. The increase is due in part to the expiration of the Social Security payroll tax holiday on January 1, 2013, in part to the expiration of the Bush-era tax cuts on some high earners, and in part to new taxes imposed on the income, dividends, and capital gains to fund the Affordable Care Act. But it also helps that the economy continues to grow and add jobs. Compared to a year ago, about two million more people are working, at slightly higher wages. That produces more income, and more taxes. Social insurance and retirement tax receipts rose $104 billion in fiscal 2013, up 18 percent. And even as they go to great lengths to avoid paying taxes, corporations have been ringing up more profits. In fiscal 2013, corporate income tax collections rose by 13 percent, or $32 billion. Growth continues to be the miracle deficit cure.
Democrats who argued that we could raise some taxes without imperiling the expansion or the market rally have been vindicated. Of course, revenues are only one side of the equation. You can’t balance budgets with tax increases alone. But there was good news on the spending front. And, here, Republicans can take some credit.
In fiscal 2013, federal government spending fell by 2.4 percent, or $84 billion. That’s a real, rare decline in government outflows. We can thank the Budget Control Act of 2011, which kept spending levels low, and the sequester, which, starting in March, cut tens of billions from the budgets of many agencies. Policy played a role, too. The winding down of the wars in Iraq and Afghanistan meant the Pentagon had to spend a lot less on its operations. In fiscal 2013, spending by the Defense Department fell $43 billion, or 6.6 percent. That accounted for about half the decline in total government spending.
And in a dynamic that is little understood, the simple continuation of growth helped reduce spending. In fiscal 2012, the Labor Department spent about $90 billion on unemployment benefits. But in the past year, as the labor market has improved, companies have been firing far fewer people. First-time unemployment claims have sunk to levels not seen since 2008. That means the government is spending a lot less on unemployment benefits. In fiscal 2013, the Labor Department spent $67 billion on unemployment benefits, a decline of $23 billion, or nearly 25 percent.
All in, the federal deficit in the just completed fiscal year amounted to about 4.1 percent of GDP. That’s relatively high, but it’s a long, long way from making America the next Greece. And the reduction was far from painless. But in an era when Washington can barely keep its doors open, some congratulation is in order. By changing a few policies, failing to come to terms on a grand bargain, and managing to avoid pushing the economy back into recession, the government cut the annual budget deficit by nearly 40 percent in 12 months.